Thursday, May 10, 2012

UNESCAP projects GDP growth rate to be 4.5% in FY 2011/12 in Nepal

Here are latest projections by UNESCAP in its Economic and Social Survey of Asia and the Pacific 2012:

  • GDP growth is projected to be about 4.5% in 2012, thanks to political instability, frequent strikes in the country, persistent labor problems and severe electricity shortages. It argues that economic revival largely hinges on improved law and order, as poor security and political instability are limiting the government's capacity to spend money and boost rural income.
  • Inflation remained close to being a double digit, 9.6% in 2011 and in 2010. Weak supply of food items kept inflation high while at the same time, the cost of production of both agricultural and industrial products rose due to severe electricity shortages and rising labor wages stemming from the Overseas migration of Nepalese workers.
  • Budget deficit is estimated to be 3.8% of GDP.
  • The growth rate of the economies of the Asia and the Pacific region is forecast to decline to 6.5 percent in 2012 with a slackening demand for the region’s exports in advanced economies and as a  result of higher costs of capital.
  • Managing growth and inflation balance seems to be a challenge in the region. Coping high and volatile commodity prices, addressing high unemployment and coping with volatile capital flows are also challenges faced by policymakers.

Considering the large remittance inflows to the region and large out migration, the UNESCAP is batting for establishment of South Asian Migration Commission:

Remittances from overseas workers are quite substantial and play a major role in the South Asian economies. Governments should consider some special and innovative institutional arrangements to protect migrants and provide social protection coverage. In this regard, a commission should be created to put forward a uniform stance of countries in South Asia to oversee migration and enhance its positive aspects. Once established, the South Asian Migration Commission could formulate the framework for a coherent and comprehensive response to the issues surrounding migration generally applicable to all the countries in South Asia . By looking into best practices regionally and internationally, the Commission could help in designing policies that harness the benefits of migration in the best possible way for all stakeholders and minimize their negative effects.

It is a good idea to have a commission to look after migrants’ rights and working condition, and channeling remittances to productive sectors instead of in consumption of imported goods. However, I think a commission at the regional level is a bit out of sync with the need for it by other countries. Nepal needs it for sure, but others might not feel so strongly about the idea. In the top ten recipients of remittances as a share of GDP, Nepal (20% of GDP in 2010) is the only one from South Asia. In terms of total amount of remittance inflows, India, Pakistan and Bangladesh (US$58 billion, US$12 billion, US$12 billion respectively) come in the top ten list. Having such commission at the national level in countries like Nepal is a good idea if the goal is to see quick policy execution and coordination. At the regional level, it will take a long time and might not work as expected. For now, I think the recommendation should have been to set up such a commission at the national level for countries where remittances constitute more than 10 percent of GDP (or say more than domestic revenue as a share of GDP). In terms of share of GDP, remittances in Bangladesh, India, Pakistan, and Sri Lanka are 10.9 percent, 3.1 percent, 5.6 percent, and 8.3 percent respectively.

That being said, it would be wonderful if a regional commission is set up (again, politically it might not happen soon) because a significant share (53 percent) of South Asia’s remittances come from the six GCC countries. About 18 percent comes from the US, 12 percent from Western Europe, 11 percent from other high income countries, and 6 percent from developing countries. The figures related to those of 2010. A unified voice is wonderful idea, but not a realistic one in terms of the time needed to set it up and to make it functional. This idea deserves further exploration and vetting.

Back to growth rate, the Nepali government expects GDP growth rate to be 5 percent this fiscal year. In Global Economic Prospects (GEP) 2012, the World Bank estimated GDP growth rate to be 3.6 percent. It blamed law and order problems, and persistent and extensive infrastructure bottlenecks (electrical shortages are reflected in widespread load-shedding and unreliable delivery). It expected exports to be hit due to the sovereign debt crisis in the EU and slow growth prospects. Exports to Europe (in particular textiles and clothing) are more sensitive to a decrease in consumer demand. If you are curious about the current state of Nepali economy, see this presentation.